Top Contractors: The Never-Ending Shakeup Continues

Pace of High-Profile Mergers, Acquisitions Now Slowing in Southeast

By Debra Wood

The spate of mergers and acquisitions in the past year or two of some of the top contracting firms in the Southeast is a long-term trend that is now slowing.

The collection of firms involved in these deals – that are active in the Southeast – reads like a laundry list of top contractors: Balfour Beatty Construction. Centex. KBR. BE&K Building Group. PBS&J. Peter R. Brown Construction. Batson-Cook Co. Kajima. Kraft Construction. Manhattan Construction. OHL Group. Community Asphalt. The Tower Group. Arellano Construction. Flatiron Constructors.

(Photo courtesy PBSJ Corp.)

And even though the pace is slowing, more names likely will be added to the list in the next year or two.

The stated reasons for these deals vary, but it comes down to survival. “In a recession, there are always consolidations,” says Ted Garrison, president of Garrison Associates, a management consulting firm in Ormond Beach, Fla., and a columnist for Southeast Construction. “We have too many contractors.”

Garrison cited figures in the recently published book, Managing a Construction Firm on Just 24 Hours a Day, written by Matt Stevens, president of the Stevens Construction Institute of Winter Park, Fla. (Stevens also is a contributor to Southeast Construction.) Garrison says that according to that book, in 1964 there were 800,000 U.S. contractors, but by 2003 that figure had risen to 2.7 million. Yet, he says, the construction dollar amount of put-in-place construction has stayed fairly constant since 1964.

“This is a killer,” Garrison says. “Now that volume is dropping, some businesses really need to go. Also, there probably aren’t enough top managers to run all those companies.”

Garrison says he expects many weaker firms, those without war chests to ride through the coming tough times, will fail. He adds that buyers will focus on value, and poorer-performing contractors will become unattractive, speeding their collapse.

Stevens himself says, “The cash flow issue is a reason for company consolidation.”

While the recession will create economic problems for some firms, Gary J. Tulacz, a New York-based senior editor and manager of Engineering News-Record’s top lists, says, “The consolidation trend is actually on the decrease at the moment, driven down only by the uncertain market and lack of available capital from financial institutions.”

Alternately, Tulacz adds the downturn could make more firms available for purchase and drive down prices, creating opportunities for companies that have the funds to finance acquisitions out of general revenue.

Service work

“The construction business has an attractiveness, with a predictable income stream, especially with a service business,” Stevens says. “Some contracts are like annuities, providing revenue for an extended period, as long as they produce what they are supposed to.”

William P. Utt, KBR of Houston chairman, president and CEO, wrote in a statement announcing the company’s July $550 million acquisition of BE&K of Birmingham, Ala., that the purchase would enable KBR to grow its service business unit.

BE&K reports employing more than 3,000 personnel worldwide in its maintenance division, which includes facilities management and supplementing clients’ workforces.

Positioning for growth

Increasing a company’s bonding capacity to take on larger projects or expand geographically are other reasons for consolidations, says Steve P. Cona Jr., president and CEO of the Florida Gulf Coast Chapter of Associated Builders and Contractors in Tampa.

On Florida’s Gulf Coast, Manhattan Construction Group of Tulsa, Okla., acquired a controlling interest in Kraft Construction Co. of Naples in August. The privately held firms did not release the price but said combined revenues total approximately $1.5 billion.

“My job is to look at the far future of the company and where it is going five to 10 years from now,” says Fred Pezeshkan, chairman and CEO of Kraft Construction. “With the downturn of the economy and the saturation of the residential market, I felt we needed to grow beyond Southwest Florida and expand our horizons to Tampa.”

“Geographical diversification is the biggest strategy that drives acquisitions,” says Will Hill, managing director of the investment banking group of Raleigh, N.C.-based FMI Management Consulting. “The second is to acquire a service or expertise the firm currently doesn’t have and is difficult to replicate.”

advertisement

Kajima USA Group of Rochelle Park, N.J., purchased Batson-Cook of West Point, Ga., in January 2008, reportedly for several billion yen, giving it greater bonding capacity and opportunities for growth.

“We were able to work out an arrangement that provides us the financial strength to grow,” says Raymond L. Moody Jr., president and CEO of Batson-Cook. “When the recession is over with, we are poised to have the growth we need.”

Moody says Kajima has not changed Batson-Cook’s operation.

“The main reason [for selling] is to provide a place for advancement for the many young and talented people in our organization,” he says.

Foreign investment

Batson-Cook is one of many Southeast players now under foreign ownership. Hochtief of Germany acquired Flatiron Construction Corp. of Longmont, Colo., which has completed many major Florida Department of Transportation projects. And OHL of Spain has purchased three South Florida firms in the past few years: Community Asphalt of Hialeah, The Tower Group of Davie and Arellano Construction of Miami.

ENR’s Tulacz says the trend of foreign firms acquiring U.S. companies may be coming to a halt with the changing value of the Euro. He adds that the Euro was worth about $1.30 two years ago, but its value rose to as high as $1.55 last spring, and that higher value versus the dollar meant that many European contractors could get more for their Euro in purchasing American firms. A similar trend occurred with the Japanese yen.

“The value of the Euro against the dollar had dropped back under $1.30, a nearly 20% change since April,” Tulacz says. “That means European firms paying in Euros will have to pay 20% more for U.S. firms as compared with nine months ago. So the U.S. is no longer the bargain basement for European contractors.”

A way out

Succession planning often motivates the seller.

“Workforces are hard to grow,” Stevens adds. “If a group has them, then they have something to bargain with. And some owners are getting older and cannot put in the 60 or 80 hours per week anymore.”

That was the case at Peter R. Brown Construction of Clearwater, which agreed to an acquisition by PBSJ Corp. of Tampa, says Randy Larson, president of PBS&J Constructors, an executive vice president of Peter R. Brown Construction and chairman of the combined boards of both companies.

From the buyer’s perspective, Larson expects the deal will allow the firm to secure more and larger design-build work. Peter Brown builds primarily vertical projects, such as correctional facilities, and some roads, and 80% of the firm’s workload has been from repeat clients.

“Our combined bonding capacity overnight doubled having Peter Brown have access to the balance sheet of the PBSJ Corp.,” Larson says. “And having the corporation have an entity like Peter Brown to bolster its bonding credential, we gained considerable favor with the sureties. As we get into the stimulus, our industry of construction and engineering will be at the forefront, and it will be important that our industries prepare for that.”